Articles · Basics · Business Deductions and Depreciation
Sole Proprietorship, LLC, S Corp, or C Corp?
A business's legal form and its tax treatment are related but different. An LLC, for example, is a state-law entity that can be taxed in several ways.
The tax classifications
A sole proprietorship reports on Schedule C of the owner's Form 1040. A partnership files Form 1065 and passes income to its partners. An S corporation files Form 1120-S and passes income to its shareholders. A C corporation files Form 1120 and pays its own tax.
A single-member LLC is disregarded by default and a multi-member LLC is a partnership by default, but either can elect corporate treatment.
Key trade-offs
Pass-through entities usually avoid entity-level federal income tax, so income is taxed once to the owners. C corporations pay a flat 21% federal tax, and dividends are taxed again when paid out.
S corporation owners who work in the business take a salary, and profit above that salary is generally not subject to payroll tax. Partnerships offer the most flexible allocations.
Other factors
Owners should also consider liability protection, investor needs, state taxes, and plans for exit. Outside investors often prefer C corporations, while S corporations have strict rules on who can own shares.
Key takeaways
- LLC is a legal form, not a tax classification.
- C corporations can create two layers of tax.
- Choose with exit, investors, and state tax in mind.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.